ROI (Return on Investment) is the overall gain generated by investing capital. It is used mainly by business owners and company executives to assess the state of the business and how to grow it.
How to calculate ROI
Calculating ROI is actually very simple: it is the ratio between the operating income of a business and the capital invested. Here is the exact formula:
ROI = Operating Income / Invested Capital.
Why ROI is so important
Using this metric to evaluate the investments you decide to make is important for several reasons. The most important is that it takes into account all the costs incurred for an investment (production, shipping and so on), which makes the assessment complete and wide-ranging.
Another key strength is its versatility: it can be applied to any type of investment, from email marketing to an advertising campaign.
It is, however, used far more in digital marketing, alongside other metrics such as conversion rate, visits, clicks and leads. Because it offers a more complete and comprehensive measurement, it has a more decisive impact when analyzing your advertising campaign.
Possible values
ROI can take on 3 different values:
- ROI > 0 = positive result. The company is generating value;
- ROI = 0 = break-even. The company is neither gaining nor losing;
- ROI < 0 = negative result. The company is losing value;
Drawbacks
Although this tool is widely used because it is easy to calculate and, above all, quick to apply, it does have some drawbacks. The values obtained from the calculation are accounting figures. For this reason, they may not reflect the true, exact value in question, because they don’t account for the actual cash flow generated by the company.